3 Steps To Managing Pricing: Lessons From The Restaurant Industry That Can Work For You

Posted by on Jun 20, 2013 in Blog

3 Steps To Managing Pricing: Lessons From The Restaurant Industry That Can Work For You

The restaurant business is notorious for its razor thin profit margins. While you might think it outrageous to pay $50-$100 (or more) for a great steak dinner that features a top grade of beef and is accompanied by all the trimmings, most restaurants are lucky if they keep 5% or less of their charge for a meal. The rest is eaten up by various costs.

To make a profit and stay in business, most employ certain steps to manage their prices and costs. Regardless of what industry you happen to be in – if you are in business to make money – the following steps can help you to be more successful and to stay afloat, even in a challenging economy.

Don’t Assume – Do Your Homework and Conduct a Cost Analysis

When it comes down to deciding what you are going to charge for a product or service, whether a meal, childcare or anything else, it pays to be exact in your calculations. Don’t just assume you know the actual cost of anything in your operation without a proper cost analysis of each ingredient or each component of your business. Know how much everything costs, and stay on top of any changes in cost. Many times we undersell our products or services because we have underestimated the true cost of producing what we sell. Should it really surprise anyone when they go out of business if they have not priced their products and services so that they recover all of the costs of production and then some? Part of a thorough cost analysis is also understanding just how many products or services you need to sell to break even – how many you need to sell to make your expected rate of profit.

If the Market Won’t Bear the Price to Cover the Cost – Change the Ingredients in Your Recipe

Costs for everything fluctuate over time. You need to be constantly aware of the changing costs and adjust your prices accordingly. If your local or regional market won’t bear the price you need to charge to cover your costs, then you need to shake things up a bit and look for cheaper materials or “ingredients.” While a restaurant might make this change by preparing a cheaper cut of meat, or use a less fresh option when it comes to their fruits and vegetables, most other businesses can find ways to get creative with their “ingredients.” Look for a cheaper supplier or less costly substitute of whatever is used to make and provide the product or service that you sell.

Change the Product or Service that You Offer – Change the Menu

Understanding what is truly the core of your business, the heart of it that keeps your customers returning day after day, week after week and year after year can also help you weather the storm of increasing costs. If you can’t sell your production at a profit, it makes sense then to cut back on the services and products that you offer and cut out the ones that are the least profitable while retaining the heart of your company.

Next week we will look at some more lessons you can learn from the restaurant industry to apply to your own business.